Forex and Dollar Weekly Report

Weekly Report 6/06/04

06JUN04

Bugsy Siegel and Al Capone were on the “pay roll”, as were Don Corleone, Lucky Luciano and Meyer Lansky. And if you believe the latest round of US Labor data, thousands upon thousands of Americans are now on the payroll as well!! Such dramatic growth in the Jobs sector last occurred nearly 4 years ago so break out the bubbly and keep up your spending, Mr. US Consumer. The only problem is that the Dollar bears didn’t believe what lay before them as evident by a run higher in the EURO, Swiss Franc (CHF), Canadian Dollar (CAD) and the British Pound (GBP). The exceptions on the week were the Japanese Yen (JPY), based on Crude Oil concerns, and the Australian Dollar (AUD), stemming from concerns that high rates there might finally be hindering growth. All scenarios will be discussed individually in the following paragraphs but, needless to say, the Dollar bearish tone remained with us for another week and it looks like this sentiment is gaining new momentum. Interest rate policy will become the dominant, overriding concern in the next few weeks but for last week the direction of Crude Oil and Global Terrorism remained at the forefront for yet another week.

EURO

The EURO continued to pick up some steam this weak as the market viewed the latest round of favorable European economic data as a pre cursor for keeping rates steady. The US also had some decent numbers hit the wires last week but they were overlooked as typically happens when a currency is in a bearish mode. The Dollar made an early attempt to make some fresh highs last week as it pushed some minor stops down to 1.2158 before finding fresh new buyers. It was back up towards 1.2260 before we got some nice two-way price action as some large hedge funds capped the1.2200 zone and some large option sellers did the same on any approach towards 1.2300. The 1.2200-30 area has been a nice pivot point of late so it was no surprise to see the EURO trading within this area right before the big US NFP jobs number on Friday. Once the solid NFP number hit the wires, we got a wild move up to 1.2375-80, back down to 1.2135-40 and then eventually running towards the former 1.2300 yet again. Rumors of European Central Bank (ECB) EURO selling emerged and when coupled with the strong option barriers located at 1.2300, this level was not breached to close out the week. The Dollar had plenty of chances to take the offensive this week but the EURO remains fixated on breaking the 1.2300 triple top on the 4-Hour charts. Once above here, look for pressure to build for a 1.2350 probe, followed by a key Daily Bollinger Band (Bband) resistance currently at 1.2390-95. A break higher beyond this resistance opens things up for another push towards the key 1.2500 zone. The downside sees minor resistance once again around the 1.2200-10 pivot area, followed by Hourly lower Bband support at 1.2175-80. A probe below here gets the Dollar bulls excited about a further extension to Daily 31.8% Fibonacci support coming in around 1.2110. Look for the Dollar fortunes to change quickly against the EURO if this week’s economic numbers point toward easier rates in Europe and rising rates in the US.

YEN

The JAPANESE YEN be quite the fickle young maiden of late. It misled a number of suitors this past week so that explains the many broken hearts (and broken bank accounts!) all around us. The trouble stems from the way the market is trading this pair based on how Crude Oil is faring. This relationship has been rock solid of late but by week’s end, the USD/YEN broke off from the secret handshake and decided to become a leader rather than a servant. Needless to say, the market suffered in a big way. Last week started off in a predictable manner as the USD/YEN pressure building to the downside continued in earnest. The Crude Oil panic run higher seemed to be stabilizing a bit so an early attempt to run some 110.50 stops higher failed. Focus returned to the aggressive Japanese bids lined up ahead of the key psychological 110.00 zone but it caved in under the incessant Dollar selling. The market ran some large stops below 110 and quickly scuttled down towards 109.00-10, poised to make an even bigger push towards the strong double bottom at 108.35. Well, that is when talk about China possible raising their interest rates started to grow in nature and the market correctly viewed that as YEN negative. Higher rates in China would be viewed as an attempt to slow down an overheating economy so that would also spill over into a trade dependant Japan, thus hurting the Nikkei’s latest run up. In no time we were trading back above 110.00 as Japanese investment names were seeing aggressively buying Dollars but this time, the 110.50 gave way quite easily as the market worked its way up to 111.55-60 on further stop hunts. It also didn’t help that Crude Oil started to look bubbly once again. Japanese export offers lined up towards 112.00 did a fine job of capping things and we headed back down to 110.70. That’s when things got really ugly on Friday, moments after the release of the US NFP data. USD/YEN spiked up quickly towards 112.00 in just a few prices but those export offers did the trick once again. Before you could even say “I wonder if I should now be short”, the market quickly reversed course and printed a low of 110.28 before running right back up to 111.55 in short order. Quite the whipsaw that did in most traders of this currency pair to close out the week but I believe that occurred because everyone got comfortable trading USD/YEN behind Crude Oil futures. Every time a key relationship breaks down (like Gold to the Aussie Dollar and the EURO to the Dow Jones Average), the moves become quite dastardly in nature and that is just what we got. Look for similar moves in the coming weeks if the market won’t let go of the YEN/Crude Oil relationship, as for the most part, the spiked in Oil has been fully priced in by now. USD/YEN seems to have found a comfort zone around 111.00-40 for now but look for selling pressure to return this week if talk of China raising interest rates and possibly floating their currency blow over. The first line of support comes in at 110.50 again and 110.00 behind. Only a probe below 109.00 and all the Japanese investment bids would set up a major test of the 108.35 double bottom. Back below here, the market would gravitate towards the huge 105-107 old Bank of Japan support area for the last major test before 100.00. On the top, look for rock solid offers at 112.00 and on up towards 112.40. Some decent stops are now in place there but 113.50 is the level that needs to hold firm or the risk of another attempt at 115 looms large. Japanese corporations and exporters are prepared to once again unload as many Dollars as they can up around there so any move above 115.00 opens up the flood gates for a formidable test of the old Sept. tops at 117.70-80.

High Yielders

The recent run up in crude oil has helped USD/CAD reverse out the big up trend move from the1.3000 area to 1.4000 in a matter of weeks. We fell back down to a low of 1.3480 this past before closing at 1.3500 but it certainly didn’t open up the week on a soft note. Bids ahead of 1.3590-00 contained some early selling and it was up towards the 38.2% 4-Hour Fibonacci resistance at 1.3725. This level held nicely and fresh sellers emerged to push the unit back towards 1.3550. Rumored option barriers rested at this level and it sure played out that way early as we saw a large commercial American bank push it back towards 1.3600. From there, a large overseas hedge fund stepped into the fray and supported the unit above 1.3595. It then ran up over 1.3625 as a large Canadian fund made a very large purchase in it’s own right. All signs pointed for a break above 1.3650 and into some sizeable stops but Canadian investment offers from 1.3640-50 held the advancing Indians at bay, while giving us a nice double top on the Hourly charts. It was then a quick retreat back below 1.3600 and pressure continued to build around the 1.3550 option barriers before finally breaking on Friday. The usual stops got run out of town and all subsequent attempts to climb back over 1.3550 failed so a probe below 1.3500 quickly materialized. The Bank of Canada (BOC) meets this Tuesday regarding interest rates but the market is looking for a no change to come out of it. The real focus for the rest of this month should really be geared towards the June 28th Federal elections. A minority liberal government hasn’t held office in nearly 25 years so look for uncertainty in this currency pair to continue up until the key vote since both parties are running neck and neck. The market ended the week with an offered tone so minor support at 1.3460-65 needs to hold steady or an even bigger test of the Daily 61.8% Fibonacci support coming in around 1.3395-00 will be severely challenged. Once below here, the market should drop to 1.3300, the Daily trend line support drawn from the 1.2685 low. For the topside, the previous option barrier support at 1.3550 now becomes resistance and only back above here would the double top at 1.3645-50 come in to play. A further rise above here should get us right back to the Daily Bband midpoint resistance at 1.3720.

“Ouch, that smarted” could be heard from the mouths of the many Australian Dollar (AUD) bulls this past week. Gold settled into a range so it made AUD longs a little more cheery at the beginning of this week but that sentiment quickly changed as we got another classic painful drop in this pair. The biggest reason sighted for the large collapse was the weaker than expected GDP numbers. Australia has been thriving over the last few years based on the high yields that their country provides to foreign investors. Conversely, many Japanese investment flows have fled their country in the form of Uridashi Bonds to benefit from higher rates in Australia as their own rates are stuck on zero. This is all fine and dandy as long as Australia continues to show positive growth to justify very high interest rates. If the latest slowing of the GDP is a harbinger of things to come, then look for much more downward pressure in this unit over the next comings weeks and months. The pair still remains under pressure to its downside so look for minor support at the Hourly Bband midpoint at .6935 and the lower Bband support just behind at .6892. The key support, however, comes in around .6830 off of the Daily trend line low that also coincides with the bottom of the Daily Bband. Once thru here, AUD is set for a much larger fall towards .6680, followed by the Daily 50% Fibonacci support now resting at .6425. From the topside, the .7000 psychological top needs to give way to open things up for a test of the 4-Hour trend line resistance off of the June 5th high coming in around 1.7155. If above here, pressure will build for a run up over the formidable top at .7205-10 area.

The British Pound (GBP) had quite the week movement-wise, but when all was said and done, it managed to close the week up some 50-55 pips from where it opened. It seems pretty clear that the “Roller Coaster Effect” was in full play as new highs and new lows lurked behind each turn. At the start of the week, buyers emerged with the intent on getting GBP back over 1.8370-75 but that attempt provided futile as we quickly reversed and headed for some minor stops resting below 1.8300. A low of 1.8280 was printed and some nice bids out of the Middle East were seen down around this level. Focus on higher British rates in the face of strong economic data came into play once again and the market made a large run higher, taking no prisoners on a probe above stops at 1.8430. It extended things a bit as a weekly high of 1.8490 was achieved but nice option barriers at 1.8500 easily repelled the GBP bulls for the time being and it was back lower once again towards 1.8280. This key level held once again, thus forming a nice double bottom on the 4-Hour charts. It also coincides with 4-Hour Bband support that has done a nice job of capping most sell offs of late. The roller coaster made yet another hairpin turn and it was right back to 1.8455 before closing the week at 1.8400-05. For anyone brave enough to dip their feet in Lake British Pound, it is practically suicide to trade this pair and ignore the EURO/GBP cross. A quick gander on the 4-Hour EURO/GBP charts shows huge support around .6625-30 followed by some nice runs higher after this floor proves its merit again and again. For the GBP to make a blow out move higher above 1.8500, this formidable .6625-30 cross level needs to finally give way or risk to GBP’s downside will continue to mount. If the market can finally punch below 1.8280, look for further weakness down towards minor support at 1.8195 and stronger Daily Bband midpoint support at 1.8130. Only below here would the market once again set its sights on the key 4-Hour 61.8 Fibonacci support coming in at 1.7870. The topside sees minor resistance at 1.8455 with much stronger option related barrier resistance at 1.8500. If the market can trigger the stops resting just above 1.8500, look for an over-extension up towards the old formidable tops resting at 1.8605-20.

Conclusion

Interest rate sentiment once again dominated all other concerns last week and with fresh new announcements in Canada, New Zealand and England on tap, it should put its stamp on this week as well. Terrorism will continue to be the big wild card as we head into the summer as crude oil concerns continue to diminish in the coming months. The European Soccer tournament this month, the Summer Olympics, the US presidential election—all dangerous events for anyone trying send a global message. The Dollar continues trading softly for yet another week and more and more market players are jumping onto this bandwagon. It wont take much to tip the scales in favor of the Dollar bulls if the US keeps putting out really good economic data as we head closer to the FOMC’s big interest rate announcement this month. On a side note, this w/e say the passing of an American hero, regardless of your political inclinations. President Ronald Reagan got America out of a very serious “Cold War Era” and it laid the groundwork for the economic boom of the 90’s. Our prayers are with his family. As always, mind your risk management and good luck to one and all.

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